As OPEC Cuts Back, U.S. Shale Fills Void

Friday March 3, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Saudi Aramco worth $2 trillion? Or 1/5th of that?

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- Saudi Arabia plans on putting up 5 percent of Aramco for an IPO, a move that could generate cash that the government wants to use to diversify the economy.
- Saudi officials say that the company is worth $2 trillion. If true, the 5 percent IPO could generate $100 billion.
- Wood Mackenzie thinks that is vastly overstating the case. The consultancy predicts Aramco is worth only $400 billion. The IPO, then, would only generate around $20 to $25 billion.
- Some Aramco officials agree that the company is worth less. Bloomberg says some insiders think the company is worth around $500 billion.
- Since the company’s assets are a state secret, it is difficult to know. But Aramco will have to disclose a lot of information ahead of the IPO.

2. U.S. oil production growing quickly

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- Bloomberg Gadfly makes the case that the latest rebound in shale drilling could result in faster production growth than the first shale boom years ago.
- The 2016-2017 growth period (red line in chart above) is moving higher than the 2011-2014 growth period did in its first few months (dark blue line).
- Since September when U.S. oil production bottomed out, total production has climbed by roughly 125,000 bpd each month. U.S. production is now above 9 mb/d for the first time in almost a year.
- The original shale boom between 2011-2014 only grew in its first few months at a pace of 93,000 bpd.
- It should be noted that some of the growth is coming from offshore projects that recently came online. But Bloomberg Gadfly argues that that was also the case in the original shale boom.
- The data should worry oil bulls. The OPEC agreement could be undermined by a swift rebound in shale.

3. How much new production will shale bring back?

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- The U.S. rig count is up 90 percent since bottoming out last May. So far this year, an estimated 77 new rigs have been added back into operation.
- There is a lag time between new rigs and new production, but with so much additional drilling taking place, U.S. oil production is set to rise. But by how much?
- Estimates vary, ranging from 400,000 bpd this year (JP Morgan) to 900,000 bpd (Macquarie and Rystad Energy).
- If that higher end of the range is closer to reality then the OPEC deal will be largely offset. The prospect of much more shale production is also pushing OPEC into considering an extension of its deal by another six months.

4. U.S. exports surging

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- U.S. exports topped 1.2 million barrels per day for the week ending on February 17, the largest weekly volume on record dating back to the early 1990s.
- The sharp rise in exports this year is occurring for a few reasons. OPEC flooded the market at the end of 2016 ahead of its production cut deal. Some of that oil is showing up in the U.S., pushing up inventories.
- The temporary glut is pushing down WTI relative to Brent. The differential is making U.S. crude (linked to cheaper WTI prices) more attractive abroad. So exports have climbed.
- It is not clear if this trend will continue, however.

5. OPEC achieves 93% compliance rate

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- OPEC surprised and impressed the oil markets in January with a greater than 80 percent compliance rate. In February, they upped their game, logging a 93 percent compliance rate, according to Reuters estimates.
- Saudi Arabia has picked up a lot of the slack leftover by Iraq, cutting deeper than its pledged 10.06 mb/d.
- Still, oil prices have not gained much on the news, as much of the price gains are already priced in, according to analysts.
- OPEC has used up much of its firepower. The only thing left now that they can do is extend the deal, a potential move that the markets are now closely watching.

6. Tesla’s cash problem

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- Tesla plans on introducing its mass market Model 3 in July, a vehicle that it has bet its future on.
- But the automaker is burning through cash quickly, posting negative free cash flow of almost $1 billion in the fourth quarter of 2016.
- That means Tesla might need to go back to the equity markets, and could raise as much as $3 billion in cash to finance the rollout of the Model 3. Tesla’s stock sank 6.4 percent on the news.
- Production of the Model 3 will hit 5,000 vehicles per week by the fourth quarter, and will double next year.
- The company’s fortunes depend on the successful rollout of the Model 3. After repeatedly missing deadlines, shareholders are anxious about Tesla’s cash burn and are closely watching 2017 as a pivotal year.

7. Exxon betting future on shale

- ExxonMobil’s (NYSE: XOM) new CEO Darren Woods laid out a new strategy this week that puts shale drilling at the core of its strategic focus.
- Exxon plans on spending a quarter of its 2017 budget on shale drilling, and it recently spent $6.6 billion on doubling its Permian acreage.
- The oil company expects to post a 20 percent compound annual growth rate in its production from the Permian and the Bakken. That will take output up to 750,000 bpd by 2025, accounting for about one fifth of the major’s total production.
- After years of low oil prices, rising debt and mistakes with megaprojects, Exxon is hoping to undertake a dramatic pivot towards lower-risk, short-cycle shale.
- The move highlights the ascendancy of shale, which is now one of the most prized investment opportunities in the upstream sector.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.